Horror stories abound -- like the 82-year-old widow who has 15% of her holdings in Apple stock and 9% in Facebook

Brooke’s Note: The wirehouses are pushing for an SRO? I have an idea. Advisors can self-regulate by blowing the whistle on indefensible portfolios that come across their desks — with no statute of limitations. Wirehouse portfolios have long been a gun that smoked out the barrel as it sat on the RIA desk after transfer. But nobody has ever found much to do with the energy of shock that they deliver like electric eels. Perhaps Aaron Klein can change all that.

For years, RIAs have shuddered privately at the outrageously awful wirehouse-crafted portfolios that prospective clients brought with them to a first meeting. Now, one firm is giving advisors a way to make them into teachable moments and to drum up business.

Now the firm is adding a piece to the product dubbed “Worstwirehouseportfolios,” in which advisors will tell tales about real-life portfolios they’ve seen from prospects.

Portfolios I have seen

“We thought it was a unique way to introduce advisors to what our technology can do for them and their clients,” says Aaron Klein, chief executive of the Sacramento, Calif.-based startup. “We hear advisors talking about these horrible wirehouse portfolios all of the time and we thought it would be funny and cheeky to illustrate the power of this tool and highlight some of the worst ones.”

Klein concedes one aspect of the site is all in good fun and is akin to Mad Libs. But the firm also hopes this site will generate buzz about Riskalyze and that advisors may choose to use the tool to gain prospects.

Previously, Klein was director of optionsXpress Holdings Inc. In March 2011, he formed Riskalyze, which was funded with investments from friends and family investors. Initially, the firm, which has seven employees began marketing the product to investors, and Klein says it helped investors build some $2 billion in assets. Then, at the end of 2012, the firm launched Riskalyze Pro, aimed at advisors.

This week, the firm was named to Fast Company’s Top 10 Most Innovative Companies.

The firm charges $99 a month per advisor for Riskalyze Pro. There is a limited free plan, which gives RIAs a snapshot of the tool.

Grandmas under the bus

Winning business by slamming the competition’s portfolio isn’t an ideal way to drum up business, says Ryan Shanks, principal of Finetooth Consulting.

“They’re throwing someone under the bus to win the business,” he says. “I think the conversation advisors will have is spot on, but I’d like to engage with someone and win the business the right way.”

Ryan Shanks: I’d like to engage with someone and win the business the right way.

But Klein is unapologetic. “I’m hoping that our entire industry will rise up and throw the idea of selling IPOs and derivatives to grandmothers under the bus. Great advisors of every stripe know that understanding client risk expectations, and designing portfolios to fit, is the only way to do business in 2013.”

15% Apple stock for 82-year-old widow

The site hasn’t been officially launched yet, but in a “soft-launch” a few advisors have posted portfolios, and Klein shared one of the worst ones with RIABiz. it belongs to an 82-year-old widow who has just under $1 million in assets and needs to tap into the portfolio for income. Her largest holding was Apple stock at 15%, and Facebook stock made up 9% of the portfolio, which consists of mostly U.S. stocks. More than 90% of the portfolio is invested in equities.

Mike McDaniel, an LPL advisor in Nevada City, Calif., who manages about $55 million in assets for 50 households, says the widow, whose husband died in the summer of 2011, came to see him a few months ago after noticing a dip in her portfolio. McDaniel says her asset drop correlated with the drop in Apple’s share price: In September 2012, it was around $700. On Tuesday, it closed at around $467.

McDaniel explained to the widow that given the volatility of her portfolio, in the short term she could lose 29% of the assets — which would be about $250,000.

The woman, a client at a wirehouse (McDaniel declined to say which one), didn’t understand how much of her portfolio was invested in individual stocks.

“When I showed her how risky her portfolio was, it was very eye-opening to her,” he says. “Her husband used to watch the finances, and she figured everything was fine. But her biggest holding is Apple, and it was going fine until it went off a cliff.”

McDaniel says he’s seen a wide range of bad portfolios but that this was one of the worst — reminding him of the movie “Titanic.” The broker, he believes, was using the classic “Viva Las Vegas strategy” of bets that favor the house.

“This is pretty rare to see and this is much more of outlier than others,” he says.

“Tim Kochis: I’m not a fan of simple, one- or two-dimensional solutions and diagnoses.

“How much does she want to spend, what income sources does she have — such as Social Security or pension? How much does she want to leave for heirs, charity?” Kochis asks. “As you can tell, I’m not a fan of simple, one- or two-dimensional solutions and diagnoses.”

Analysis part of the equation

McDaniel grants that crafting any portfolio requires knowledge of a wide range of factors — including tax information, income needs, estate planning desires and risk tolerance. He says he’s spent a great deal of time talking with the client and will be meeting with her again on Thursday to chat more before making any changes to her portfolio.

“Knowing how much risk a client can handle is a foundational piece of information. Knowing risk tolerance and the risk associated with a given strategy allows for a candid discussion on risk/return and expectations,” McDaniel says. “Setting expectations is paramount to a productive long-term relationship.”

loads of factors

Sandi Bragar, a principal and director of planning at Aspiriant, agrees.

In general, Bragar says, her firm does try to limit individual stocks as large holdings in portfolios.

“We feel that individual stocks are not that diversified and aren’t going to give clients’ a lot of exposure across the world,” she says. “We’ll want clients to have commodities, fixed income and other sources.”

It’s not that uncommon for prospective clients to come to Aspiriant carrying unconventional portfolios.

“When we meet with prospective clients, the portfolios tend to be all over the place,” she says. “These types of portfolios do happen from time to time.”

While it seems as if there should be simple solutions to these wild portfolios, Bragar says it takes a great deal of time for an RIA to come up with the right allocation.

“We spend a lot of time talking about risk and doing a better job making sure the clients understand the risk they’re taking,” she says.

Choosing risk

Klein says he feels his tool is a starting point to help advisors illustrate the risk that prospective clients may be carrying in their current portfolios.

He says the technology quantifies risk tolerance using quantitative math. “It’s sort of like a quiz, but a mathematical quiz,” he says. “We’re testing when someone is willing to choose certainty and when they’re willing to choose risk.”

You can start the reprint process right here, or just contact Frank Noto, our director of sales, at (415) 389-8206 or frank@riabiz.com.

Reprints come on glossy 100lb stock. The production time is 7 business days from approval of final design/layout, but often goes faster. Shipping charges will be additional, and the order may be subject to applicable regional/state taxes.

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